As mounting fiscal instability in France sends tremors through the global bond market, analysts suggest the crisis could paradoxically act as a downward pressure factor for interest rates in South Korea’s domestic treasury bond market.

If the risk premium widens in the European sovereign bond market, global investors may reallocate capital toward relatively safer assets, such as U.S. and South Korean government bonds.

According to the financial investment industry on the 21st, experts weigh the possibility that France’s fiscal issues will be managed step-by-step through the European Union’s fiscal monitoring and the European Central Bank’s (ECB) market stabilization measures, rather than escalating into a systemic crisis for the entire eurozone.

## France’s 10-Year Yield Hits 4.9%: The Real Issue is 'Political Execution', Not Just Fiscal Deficit

As of the 19th, the yield on France’s 10-year government bonds climbed to 4.9%. The yield spread between French and German bonds also widened to approximately 145 basis points (1 bp = 0.01%p).

This indicates a growing number of investors demanding higher yields on French bonds compared to German bunds. The yield gap between the two countries has nearly doubled from the 60–80 bp range seen in the middle of this year.

Behind this trend lie high national debt and fiscal deficits. France's government debt-to-GDP ratio stands at roughly 119%, with this year's fiscal deficit projected at around 5.4%.

iM Securities analyzed that rather than an immediate risk of national default, the core issue is whether the government can actually execute policies to restore fiscal soundness.

In particular, doubts are growing over the feasibility of passing budgets and implementing fiscal adjustments due to political conflicts within parliament, social backlash against austerity, and uncertainties ahead of the 2027 presidential election.

The ECB's response remains a key variable if market instability worsens. The ECB could adjust the pace of its quantitative tightening (QT) or consider deploying the Transmission Protection Instrument (TPI), a tool designed to support the sovereign bond market.

Ultimately, whether French bond yields stabilize depends not only on the ECB's potential intervention, but also on whether the French government can restore market confidence in its fiscal reduction plan.

## Capital Flowing to S. Korean Bonds Amid European Instability? Spotlight on 2010–2012 Precedents

The domestic market's primary focus is on how France's fiscal instability will impact South Korea’s treasury yields and the won-dollar exchange rate.

iM Securities highlighted that during the European debt crisis of 2010–2012, overseas risks expanded, yet U.S. and South Korean bond yields generally declined, accompanied by continued foreign purchases of domestic bonds.

According to iM Securities, net foreign purchases of South Korean treasury bonds reached 24.28 trillion won in 2010, 17.61 trillion won in 2011, and 46.86 trillion won in 2012.

Foreign investment in treasury bonds persisted even during periods of Korean won depreciation, indicating that a weaker won does not necessarily equate to an exodus of foreign bond funds.

However, in the early stages of the European debt crisis around April and May 2010, while the yield on U.S. 10-year Treasuries dropped by about 36 bps, South Korea's 10-year yields actually rose by 11 bps. The won-dollar exchange rate also climbed by roughly 85 won.

As the crisis progressed, market reactions shifted, leading to a decline in domestic bond yields. While risk aversion can initially cause both the won and domestic bonds to weaken simultaneously, safe-haven demand can subsequently flow into South Korean government bonds.

The shock from France can transmit to South Korea through two main channels. Heightened global risk aversion could burden risky assets like the Korean won and equities. Conversely, if capital flows into relatively safe government bonds, it could limit upward pressure on domestic treasury yields.

Of course, the financial environment of the past European debt crisis differs from today. The direction of South Korea’s bond yields is influenced not only by France's fiscal instability, but also by the Bank of Korea's monetary policy, U.S. treasury yields, and foreign supply-demand dynamics in futures and spot markets.

Going forward, the critical watchpoints are whether the yield spread between France and Germany spreads to neighboring countries like Italy, and whether conditions are met for the ECB to step in for market stabilization.

"Defensive demand stemming from France's instability could curb additional upward pressure on domestic treasury yields and serve as a factor supporting market strength," diagnosed Kim Myung-sil, a researcher at iM Securities.

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